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FedEx Profit Forecast Shows Stalling Economy

Fed Ex Recession

By SAMANTHA BOMKAMP   09/18/12 04:50 PM ET  AP

NEW YORK -- FedEx Corp. says the global economy is stalling, and it's going to get worse next year.

The conditions are shrinking earnings at the world's second-largest package delivery company. Factories are making fewer items for FedEx to ship and customers are opting for cheaper delivery options to save money.

FedEx on Tuesday cut its outlook for global growth and industrial production while slashing the forecast for company earnings. And CEO Fred Smith suggested trade has slowed to levels seen during the last two significant economic downturns.

It's more evidence that the global economy has a way to go to a full recovery. Several countries in Europe are in recession and the U.S. is struggling with high unemployment and weaker manufacturing growth. And Smith said some experts have underestimated the severity of the slowdown in exports from China, where FedEx has invested heavily over the last several years, adding new planes to export goods and expanding its hubs and network.

FedEx's forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business. Bigger rival UPS said in July that it expects the global economy to get worse before it gets better. UPS also cut its earnings forecast.

The slow pace of economic recovery is hurting FedEx because it relies on sharp spurts of demand to feed its air network. Demand for air freight is usually strong coming out of a period of slow economic growth, because retailers have whittled down their inventory and need to replenish quickly when demand picks up. The current recovery in the U.S. is the slowest since World War II.

FedEx lowered its expectations for U.S. economic growth to 2.2 percent in 2012 and 1.9 percent next year. Those are mostly in line with economists' views.

FedEx, based in Memphis, Tenn., cut its earnings forecast for the fiscal year ending in May to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously.

For the current quarter that ends in November, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That's well under analysts' forecasts. FedEx will get a boost from major technology product launches, like the recently announced iPhone 5, but not enough to make up for the slowdown elsewhere.

Economic growth around the globe has slowed over the last several months. Output has declined in Japan, China and elsewhere in Asia. U.S. industrial production last month fell by the largest amount in more than three years, as factories produced fewer cars, pieces of furniture and other goods. Meanwhile rising gas prices and high unemployment kept consumers from spending freely.

Smith said a continued slowdown in the developed world combined with high fuel prices will keep trade volumes trailing growth in the world's economies, mimicking a trend seen in the last two recessions.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, agrees with that forecast, calling the current economic expansion "lethargic."

"Trade has been hurt significantly," Sohn said. "China was a fast growing export market for many countries including Germany and the United States. But now China is slowing. That hurts sales of everything from Mercedes Benz automobiles to Napa Valley wines."

Most of FedEx's pain is caused by a steep decline in Asian exports due to weakness in Europe. But consumers and business around the globe are also choosing to move goods by ground or ocean instead of by air to conserve cash. Smith said an "incredible increase" in fuel prices is a factor in that behavior.

Those changes are having the biggest impact on FedEx's Express unit. Operating income for Express, which is about double the size of any other unit, fell 28 percent in the first quarter. FedEx said major changes at the unit will be announced next month.

The company's earnings predictions don't include that restructuring. Because of this, Dahlman Rose analyst Helene Becker thinks FedEx's performance might exceed its own expectations.

FedEx shares dropped $2.72, or 3.1 percent, to $86.56, contributing to a mixed performance in U.S. stocks. The Dow Jones transportation average, which is made up of trucking companies, railroads and airlines, lost more than 1 percent Tuesday. That compares with virtually no change in the Dow industrials and a decline of only 0.2 percent for the Standard & Poor's 500.

Truckers and railroad companies aren't faring much better than FedEx. September is one of the most critical months of the year for freight companies because it marks the end of the back to school rush and the start of the holiday season. This year, the normal peak shipping season has been soft as retailers carry less inventory and freight prices fall because of waning demand.

In the three months that ended in August, FedEx Corp. earned $459 million, or $1.45 per share. That hit the top end of its recently lowered estimate. Revenue rose 3 percent to $10.79 billion. It earned $464 million, or $1.46 per share, on revenue of $10.52 billion in the same quarter a year ago.

The company's ground unit performed better in the first quarter as it benefited from customers trading down. Operating income in the company's ground segment rose 9 percent on an 8 percent increase in revenue.

______

AP Economics Writer Martin Crutsinger contributed to this report.

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